Construction concern

It is not just house prices falling in Australia. ANZ Research believes housing investment is likely to decline as well - and has significant concerns over the round of projects outside the near term.

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The decline will be only mild to begin with given the volume of work under construction but sharper declines are anticipated through to 2020.

" ANZ Research has significant concerns over the next round of projects.”

There is more than $A40 billion in housing construction currently underway in Australia and this will support activity over the near term. Most of this work is in New South Wales and Victoria and in particular the apartment segment in Sydney and Melbourne.

The story after that looks different.

Tight

The tighter credit conditions affecting property prices are also impacting the construction sector. Presales of units/apartments are increasingly difficult to obtain, which makes financing new projects challenging. Respondents to the ANZ-Property Council survey suggest the outlook for finance is the weakest since the survey commenced.

Other indicators are also soft. Building approvals are trending 6 per cent lower than their most-recent peak at the end of 2017. Housing finance approvals for the construction or purchase of new dwellings have come off by a similar amount, pointing toward further weakness in building approvals in coming months.

In all, ANZ Research expects housing investment will actually rise by about 2 per cent in 2018, largely due to strong growth in the first half of the year. But the decline in investment is then likely to gather pace through 2019 and 2020, shedding around 6 per cent to 7 per cent each year.

Challenges

The challenges don’t quite stop there. As noted in September, the large volume of construction taking place across the infrastructure sector risks ‘crowding out’ housing investment by driving competition for labour, materials and equipment.

At first glance the record pipeline of road and rail work across New South Wales and Victoria is good news for the construction sector. But costs are already rising sharply and the concern is these pressures will spread to housing construction as well.

The New Zealand experience showed us despite a solid pipeline of work, rising construction costs can lead to negative outcomes for contractors and developers. ANZ Research continues to watch this space closely.

Daniel Gradwell and Jo Masters are Senior Economists at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.